Company update: Inox Wind (Outperformer) - Winds of change

INOX Wind (INOX) is set for a turnaround after a disappointing FY18 (wind power installations fell 40% yoy to 1.8GW). We believe the transition from Feed in Tariff (FiT) to auction regime will help turn the tide in the wind power industry in FY19E. The transition, which led to cancellations in existing order books of OEMs, caused earnings to disappoint in FY18. INOX too saw an 86% decline in FY18 revenues. However, we believe FY19E will be promising for INOX, boosted by the company’s order book of 950MW and auction pipeline of 10GW (expected for the industry) each in FY19E and FY20E. INOX is suitably placed to reap the benefits from the new regime, resulting in PAT of Rs2.1bn in FY19E and Rs2.5bn in FY20E. We reiterate our Outperformer rating on the stock with a target price of Rs136/share (12x FY20E P/E).

Promising industry outlook: Post 7.5GW of auctions in FY18, the wind power industry’s transition from FiT to the new auction regime is almost complete. FY18 was a disappointing period for the industry, as installations fell 40% yoy to 1.8GW. The central and state governments are expected to conduct 10GW of auctions in FY19E and FY20E each, which will drive order backlogs for OEMs. With the glitches from the transition almost resolved, impending auctions will enable 4GW and 5GW of installations in FY19E and FY20E, respectively, in our view.

INOX has a healthy 950MW order book in wind auction: INOX has a strong order book of 950MW. The order book constitutes 250MW each under SECI tranches 1 and 2, 200MW under tranche 3, 100MW under tranche 4 and a 50MW order from states won on its balance sheet (SECI 1 and 2 downsold to leading IPPs). INOX has also received orders from third parties for 100MW of projects won under SECI tranche 1 and 2.

Receivables decline; margins conservative: INOX reduced its receivables from Rs24bn (end Mar 2017) to Rs11bn (end Mar 2018) and  further to Rs8bn (end May 2018), which largely addresses market’s concerns. We estimate INOX’s EBITDA margin to slip to 13.0% in FY19E/FY20E (peak margin was 16.5% in FY2017) due to low tariffs and increased competitive intensity under the new regime.

Attractively valued on sharp turnaround: We expect INOX to execute 600MW/623MW of orders in FY19/FY20E, respectively, from its strong order book of 950MW as on date and future orders in FY19E. As a result, we estimate a profit of Rs2.1bn in FY19E and Rs2.5bn in FY20E. INOX currently trades at an attractive P/E of 8.6x FY19E, considering the sharp jump in earnings trajectory. We reiterate Outperformer with a target price of Rs136/share (12x FY20E P/E).